Measuring house price movement is not as easy as it sounds, especially if you are removed from a local market.
No two properties are ever the same, with size, position and quality varying significantly.
Making things even more complicated is the fact that even similar properties can sell for very different prices, especially considering seller and buyer circumstances in these challenging economic times.
One common model used by many firms internationally is what is known as a ‘repeat-sale’ model.
This does have the distinct advantage of being simple to implement and requiring only an address and the sales history of the property to calculate price growth over time.
Some drawbacks include the assumption that the house has not been renovated over time and the fact that only houses that have sold twice are used in the calculation, leaving many properties out of the sample.
Another common method used is the median price.
Although it is widely used in the media, it is highly vulnerable and often returns very poor growth estimates.
The most significant problem is that the characteristics of what sells in the market change over time.
Right now we are seeing a high proportion of sales at the lower end of the market in some States, which in many areas is dragging the median price down considerably while small sample sizes further compound problems with medians.
Compared against other more robust measures, the median is often found to be wrong.
Another common situation currently is in suburbs with a high proportion of new homes.
As real incomes increase over time, the quality of new homes improves.
With government incentives pushing first home buyers towards new house and land packages, the median price has increased significantly in some of these areas, even when established homes may have in fact depreciated.
Price segmentation graphs are one tool that can sometimes help identify how reliable (or not) a median price estimate is. If the price distribution of a given market looks normally distributed in both time periods, the median may be a better indicator than markets with odd shaped distributions.
For example, many markets have a mix of top end properties (think luxury apartments on the Gold Coast) and lower end units away from the beach front.
So what does this all mean?
Things may not be as bad as the media portrays as far as property values “plummeting” and values being lost!
Use your judgement based on facts not on emotion and, understand where the data is coming from and how to interpret it.